We do love the smell of a good trade war in the morning
Trade wars underpin, underline, our more general view that political management of the economy - of life itself - is something to be avoided.
The base logic is terribly, terribly, simple. Imports are the benefit of trade, exports the costs. Imports are the labour of Johnny Foreigner that we are able to consume, to our benefit. Exports are our sweat of hand and brow that we send off for some other chappy to consume and benefit from. Exports are costs, imports benefits.
At which point, this:
Rishi Sunak’s plan to scrap thousands of EU laws by the end of this year risks triggering a full-scale trade war between the UK and Brussels, senior figures in the European Union have warned.
Letters from leading EU politicians, seen by the Observer, reveal deep concern that the UK is about to lower standards in areas such as environmental protection and workers’ rights – breaching “level playing field” provisions that were at the heart of the post-Brexit trade and cooperation agreement (TCA).
In retaliation, EU leaders in the European Commission, the European parliament and the council of ministers are preparing what they call their own “unilateral rebalancing measures” in secret meetings in Brussels. Sources say these are certain to include the option of imposing tariffs on UK goods entering the EU single market.
The British Government is considering doing some things which might be of benefit to British citizens, to inhabitants of Britain. Whether they will be or not we’ll leave to one side, it’s not relevant to our point here. The reaction from J. Foreign is that in the face of such absurd provocation they will make their own citizens, their own inhabitants, worse off.
For that is what the imposition of tariffs is. EU folk will no longer be able to - or must pay a higher price to - enjoy the work and labour of Britons. This makes those EU folk worse off. But this is the very threat which is supposed to make us quail in our boots? Europeans will be made worse off so we Britons must not do that?
The reason for this absurdity - and it’s not just the EU subject to this mal-thinking - is that politics views trade through a mercantilist lens. Exports are the aim, piling up the gold bars achieved from them the benefit. This view is 247 years out of date (since the publication of Adam Smith’s Wealth of Nations) at the least. Yet it is still how politics and trade policy interact.
Given that politics and politicians have had that near quarter millennium to get this point right and have, gloriously and completely, failed to do so, we end up with the insistence that politics and politicians are not the way to decide trade policy. For after all those years if they’ve not managed to note it yet we can safely assume they never will.
A politics and politician free trade policy is one of free trade. Actual, real, whole and total, free trade. So, if politics and politicians are going to be - as they are - really, wholly and totally wrong about trade then we must have free trade, mustn’t we?
Once again the steel industry is missing the point
We can all argue over whether we should have a policy about climate change emissions but start from the point that we do. That policy being that Britian should stop doing things which have lots of climate change emissions:
“Some of the reduction in steel production is in response to reduced demand, but the exorbitant energy prices faced by industry have clearly taken their toll on industry in the UK.”
Soaring energy costs, typically at least 50 per cent more than continental competitors, and environmental penalties levied on high carbon-emitting plants are behind a decision by British Steel, the operator of blast furnaces at Scunthorpe owned by Jingye, of China, to cut 800 jobs, a quarter of its workforce.
As with Tata at Port Talbot, that’s working then.
No, really. The aim, the point of the policy, is that we stop doing things highly emittive like use blast furnaces to make iron and steel. We’ve made using blast furnaces to make iron and steel uneconomic. Excellent, job done.
The industry complaints are that the policy is working in achieving its express aim.
This is then followed up with the begging bowl:
It applied for £300 million of state aid to save the plant…(…)…“This is a critical point in time when the sector needs to decarbonise and transform, something that can only be done in partnership with government,”
….and so on and etc. Having been deliberately driven out of business in this old tech we now want subsidy to build the new tech - DRI steel making for example.
But that’s incorrect. If it makes economic sense to build a DRI plant in Britain then one will be built. It’s not difficult to find the capital for things that make economic sense. If no one is willing to put the capital into a project then we’ve that very good indication that it doesn’t make economic sense. At which point of course government shouldn’t be throwing the populace’s cash at something that doesn’t make economic sense - that just a way of making the populace poorer.
Either making virgin steel in Britain using non-emittive techs makes sense or it does not. That it doesn’t make sense but we must dun taxpayers to do it anyway is not a good idea.
We do not, for a moment, think that the steel industry nor its fund raisers are ignorant of all of the above. We do think that politics might be stupid enough to swallow the glaring inconsistencies in the logic behind that begging bowl. We mean we hope they won’t be that silly but worry that they will.
The entire aim of climate policy is to close down industries like this archaic method of making virgin steel. If the new method doesn’t make sense to do in Britain then it doesn’t make sense to do it in Britain.
There is nothing else anyone needs to know here - nor anything else anyone should fall for either.
The TUC just isn't doing economics here
British lifespans are longer now than they used to be. The portion of life spent in retirement has - on average of course - more than doubled since the 1970s. Therefore household wealth has increased over that period. Any analysis of household wealth in the UK over time which ignores this simple and obvious point is simply not doing economics.
Which is what we need to know about the TU’s latest report - it’s not economics. From The Guardian:
Meanwhile, the rocketing value of property, private pensions and shares have helped the UK’s wealth to grow by 70% since 2010, with most of the gains going to the top 10% richest households. Since 1979, household wealth adjusted for inflation has almost trebled, gaining £7tn.
Yes, obviously, and why wouldn’t we want this to be so?
1970s lifespans were around 72 years. Today they’re more like 81. Given a static retirement age of 65 (which is about right for private, if not state, pensions) that means lifespan in retirement has gone from 7 to 16 years, a more than doubling.
Rational people provide for their retirement. As that quote states pensions wealth has risen. In fact, around and about, pensions are some half of household wealth. Further, from the ONS:
Median wealth was highest for households whose head was aged 55 years to under State Pension age (£553,400); the wealth of this group was 25 times higher than those aged 16 to 24 years.
Across that age distribution wealth is highest where the mortgage is paid off (well, likely to be so) and the pension pot is still being topped off before retirement and drawdown.
Pensions and household wealth interact in what are called lifecycle effects. Any analysis of household wealth which does not include lifecycle effects is not doing economics. The TUC does not include such effects in its analysis. The TUC is not doing economics. QED.
Note what we are not saying here - that if these lifestyle effects are included then everything is peachy. We also do not insist that they explain everything. We agree there are problems in the British economy, we even have some useful ideas of how to solve them. But what we do insist is that any analysis of wealth that does not include lengthening lifespans and pensions wealth is so incomplete as to be wrong.
We have other complaints as well - the conclusion to the report seems to be that at a time of galloping inflation and labour shortages therefore more government spending is required for the joys of the stimulatory effect of such spending. No, just no, really.
Whatever we do decide to do about the economy we must at least start from a useful economic analysis. This is not what the TUC is providing here - it’s not good economics, barely economics at all.
The NHS is a really bad health care system
The Commonwealth Fund (no, nothing to do with The Commonwealth as we Brits understand it) is an activist group in the US arguing for single payer health care. As a part of that they release reports every now and again attempting to rank the different rich world health care systems. Some years back those reports used to say that the NHS was one of, if not the, best in the world.
This feat was achieved by ranking upon things the NHS does well in. Things like equity of access - note, not speed of, just equity - equality of financing and so on. Vastly more than half the ranking marks came from such arguable definitions of “better” and, as we recall it at least, only 12.5% came from an actual measure of the performance of the health care system as a health care system. That’s the measure of “mortality amenable to health care” where the NHS used to - again according to memory - used to come last.
That is, the NHS was very fair and equitable and not very good.
Fortunately for our fading memories the Commonwealth Fund has just updated their set of measurements, here. By the measures they emphasise the US health care system does very badly - which is their point in the report of course. They are, after all, a group advocating a significant change in the US health care system. Given that neither we nor anyone sentient propose importing the American health care system we can simply note that and move on to what the report reveals about the NHS.
Which is not good. In terms of financing it’s pretty expensive. Below Germany’s 12.8% of GDP at 11.9% for the UK. But above Sweden’s at 11.4%, Holland at 11.2%, Norway at 10.1%.
But on life expectancy the UK is second worst, after the US. On avoidable deaths (that “mortality amenable to health care”) it’s second worst after the US.
This is not a good performance. Relatively expensive and relatively inefficient. Or, to put that another way, a thoroughly bad deal on one of the things we actually want from a health care system, how much health care do we get for our money?
Do note that this information comes from people trying to tell us how bad the US system is. It’s just that when we use those same measures the NHS also isn’t very good - in fact, it’s bad.
All of which would seem to suggest that we get rather more European about our health care system. Or, again in another manner, perhaps we could ask the NHS to worry a little less about equity and equality and a little more about efficiency?
That BBC and bad economics report
That the BBC doesn’t quite understand economics - as the claim is - shouldn’t be all that much of a surprise. For many others don’t either. Here, from a report on the report:
How different might the last decade of British politics have been if the public had been better informed about economics? It’s the inescapable thought I had when reading through the BBC’s newly published “thematic review” into its coverage of “taxation, public spending, government borrowing and debt output”.
Would a public not spoon-fed mush about the supposed perils of government borrowing have been so ready to accept David Cameron and George Osborne’s austerity in the early 2010s?
But what austerity? In 2008 public spending was 40.1% of GDP. In 2016 it was 40.4%. Government spending went up in nominal, real and proportional terms.
The actual meaning of austerity being employed here is “less than I want of other peoples’ money spent on things I like” which is entirely understandable of course but not exactly a great basis for public policy. Or this:
There are reputable economic arguments for austerity. “Expansionary fiscal contraction”, as developed by the political economist Alberto Alesina and others, was one of them. A decade of experience suggests that it was terribly wrong, but this was at least a coherent argument, based on a recognisable economic logic.
But it wasn’t wrong nor was it even austerity. The “expansionary” there shows that it’s not austerity. The logic is - and it’s irrefutable too - that it is the combination of monetary and fiscal policy which determines whether overall conditions are expansionary or not. It is thus possible to restrict the growth of - note not cut - public spending, or taxation, to produce less fiscal stimulus than otherwise would be the case. At the same time so loosen monetary policy that the overall effect is expansionary. Which is what was done - all that QE - and also how Britain came out of recession in 1932/3, by actually cutting spending, raising taxes but also coming off the gold standard.
Still we look forward to this:
The BBC says its director general will be drawing up an “action plan”. At a minimum, this should address the lack of training for its journalists in economics issues, and encourage broader range of expertise in reporting.
Who is going to be doing that training? The people who write Guardian columns? We’d not think that a grand advance in economic understanding to be honest. There’s obviously no hope at all that grounded realists like us would be allowed to shape the understanding of the nation. Of course not, we all know that.
The difference between causality and correlation is fairly important
We’ve a new report stating that obesity is making us all poorer:
Areas in England with the most overweight and obese people also have the lowest rates of productivity, according to research showing “obesity is an economic as well as a health timebomb”.
Conversely, places with the highest gross domestic product (GDP) per head have much lower proportions of citizens who are dangerously overweight, the analysis shows.
Well, yes. The report then goes on to suggest that if we reduced the obesity rates then GDP would be higher and we’d all be richer. It’s that second bit which isn’t obviously so.
There’s the usual mistake of course, obesity is seen as a cost to the NHS. As we’ve pointed out many a time before when we have a lifetime health care system it has to be lifetime health care costs which are used to calculate the costs of any particular disease, affliction or condition. And the obese do indeed die earlier (well, the morbidly obese, on average) and as it works out this reduces lifetime health care costs. As do drinkers and smokers. We all do gain - yes, despite current complaints - end of life health care from the NHS and it’s not obvious that those costs are greater for those who have over-indulged in any of the trio of booze, tabs and doughnuts. But that dying earlier reduces the number of years that standard health care costs have to be carried - overall shorter lifespans save the NHS money.
We’ve also a new and interesting mistake here.
Obesity tends to be associated with poverty in our society. That’s one measure of how rich it is, of course. Until perhaps a century ago only the rich could even afford to be fat. But we also tend to think that people are paid their marginal productivity. Which means that incomes are lower in areas with lower productivity. Also, lower incomes means people are poorer by that national comparison.
So, what we’ve really found here is that there’s a correlation between relative poverty and relative poverty. Lower GDP, relative poverty and diseases - or conditions - of poverty are correlated.
It’s, umm. something of a leap to then conclude the causality runs from the obesity to the relative poverty. Possibly even a vaulting over a chasm in the logic.
To be very polite about this let us say that we’re less than convinced about that final step there. For the conclusion is that if we were slimmer then we’d be richer. And, well, obesity rates are very much lower in very poor societies, so we’re really unconvinced that it does work that way.
It would have been much simpler to do this at the beginning
The latest demand about climate change:
Green taxes should be added to clothes, gadgets and red meat as part of the Government’s net zero plan, a new report from its former “nudge unit” said.
More than 70 per cent of people backed extending carbon levies to include clothing and electronics in a survey by the Behavioural Insight Team (BIT).
Well, yes, obviously. If we assume that CO2-e emissions cause problems then all CO2-e emissions should be treated in the same manner. Because all CO2-e emissions are the same thing causing the same problem.
Of course, we we don’t assume that CO2-e is a problem then we’ve not a problem to solve.
We also have a long report on what to do about this, The Stern Review. Which tells us what to do if we do make that assumption that CO2-e is a problem that must be dealt with. We do not have “green taxes” - another impost on whatever the environmentalists wish to mither about this week. We have the one tax on CO2-e and only CO2-e from whatever source. We have “a” carbon tax, not green taxes.
Thus fumes from fertilisers, cow burps, fossil fuel emissions, emissions from making cement, gadgets or clothes are all treated in the same manner - because it’s the CO2-e that has been identified as the problem.
We’re even told how much this should be. Some $80 per tonne CO2-e. UK emissions - yes including imports - are of the order of 500 million tonnes a year. That means $40 billion of tax or, in real money, perhaps £30 billion. We already pay emissions taxes of that amount and more, fuel duty.
There is nothing at all in climate change which says government should be larger. Only that a Pigou Tax is the correct response to the emissions which cause the problem - for those who believe there is a problem of course.
Once we understand the science here - and this is the economic science about the problem on that assumption there is a problem - then public policy becomes very simple.
Reduce fuel taxes so that emissions from fossil fuels are correctly taxed, then increase emissions taxes elsewhere in the economy so that those other emissions are correctly taxed. For we are already all paying the correct amount it’s just badly distributed.
One of the grand truths about climate change is that according to that economic science concerning climate change we’re already solving it. We already suffer the correct taxation to deal with it that is. We just do it very badly at present and should do it better.
It really would have been very much simpler if everyone had understood what Stern was actually saying those 17 years back and based public policy on what he did actually say. But, you know, politics and governance.
Welfare shouldn't be complicated
Every year, Parliament passes a bill called The Social Security Benefits Uprating Order. This bill is likely one of the most consequential acts of Parliament for millions of people on low and medium incomes across the country- but if you’d like to read it, you’ll have to sit down: like it is every year, the latest one is over fifty pages long.
The bill directs government departments to increase around 250 different benefit parameters: numbers like the Universal Credit child allowance or the Pension Credit Minimum Guarantee level. Each of these parameters is one element of our intricately-designed tax-benefit system, and the burden of this complexity falls directly on the poorest in society: either through the questions they are forced to answer to qualify for support, or in the now unimaginably complex task that financial planning becomes for them.
A counter-argument jumps up: but we need all these details to account for individuals’ complex needs. But this seems at odds with our attitude to the people we do know. Imagine your neighbour fell into a period of financial difficulty: how many questions would you need to ask them before you could say how much state support they ought to be getting? If it’d take any time less than 45 minutes: congratulations, you’re faster than the DWP.
Things don’t actually have to be like this. The number of calculations we need to force claimants and their benefit administrators to make is almost certainly far less than the hundreds we currently do. The nation didn’t take well to the notion of extra compulsory maths, deriding it as overly paternalistic: why force such a burden on welfare claimants?
Deeply woven into the current system are hundreds of mechanisms by which we treat some claimants differently than others: for example, whether a person’s financial difficulty began before Universal Credit’s introduction or after, or their hourly wage, might drastically change their entitlement. If benefits should be based on need or deservingness, what relevance is this? Of course, this isn't necessarily true of all the questions the DWP asks: disadvantages like disability are still important and should still entail higher support.
Moving welfare along the axis of simplicity but preserving its generosity shifts us toward programs that might look more like a negative income tax (NIT). This is a very broadly-defined concept with a simple proposition: income tax should start below zero, representing a transfer from the government to the taxpayer.
Governments have implemented NIT-style policies to varying degrees: refundable credits in the US can prompt a payment from the IRS to the taxpayer, but only for the slightly-poor and not the very-poor. (1)
Here’s an example: we could guarantee each adult £60 and each child £100 per week by replacing Universal Credit and phasing out a benefit at 35% for every marginal pound, without adding to the budget deficit. PolicyEngine estimates that this reform could give an extra £400 to the average household in the lowest income decile, and lift around 1.2 million children out of poverty. (2)
No model is certain, of course. This impact relies on the negative income tax payments reaching everyone, an assumption which is not unreasonable: programs which pay first and ask questions later have far higher take-up rates than those which ask first and pay later. (3) Child Benefit shows the sheer efficiency of the pay first, ask questions later (and don’t ask too many) approach to welfare, with the highest take-up rate of any benefit by far.
The notion of equal treatment is seen almost nowhere in the tax-benefit code, but this kind of reform would move us closer to treating low-income people more equally with each other. It does however leave untouched a different dividing line in our treatment of people: the inequality of work incentives between people on benefits and everyone else.
Negative income taxes still have the same problem as every other type of benefit that phases down to zero: beneficiaries are forced to pay far higher marginal tax rates than anyone else. People on Universal Credit pay an average of 56p back to the state for every marginal pound they earn, compared to the average of 35p for non-claimants. The phase-out in the above NIT reform is lower, but functionally does the same thing.
When it comes to work incentives, the negative income tax diverges from a policy often described in the same breath: a universal basic income, which provides an unconditional equal cash payment to every person. While a NIT and UBI might sound like the same thing, a UBI doesn’t include any kind of clawback, forcing policymakers to fund it from reforms to general taxation- reforms that would affect everyone, without separating into beneficiaries and non-beneficiaries. UBI doesn’t even have to directly tax labour: we could fund it with fees on carbon emissions or land rents.
This kind of radical egalitarianism necessitates equal treatment of an entire population, and only a few governments have had the courage to implement it: progressive havens like Idaho (4) and Alaska. These states combined the values of equality and fairness with its most practical implementation: if we share those values, so should we.
Refundable credits like the Earned Income Tax Credit and the Child Tax Credit only benefit filers with earnings.
Absolute poverty (under the government definition) is defined as living with income below 40% of the 2011 median household income, adjusted for inflation and before housing costs.
For example, Child Benefit’s pre-HITC takeup rate was around 96%. In the same year, means-tested benefits ranged between 55% and 88%.
The grocery tax credit is an unconditional cash payment with no income requirements, funded out of general tax revenues- the definition of a universal basic income.
We have beaten absolute poverty in the UK
We’re told that poverty is still among us:
“There is no primary poverty left in this country,” Margaret Thatcher told the Catholic Herald in 1978, five months before she became prime minister. “There may be poverty because people don’t know how to budget, don’t know how to spend their earnings” but such poverty is the product not of social policy but of “personality defect”. Almost two decades later, in her 1996 Nicholas Ridley Memorial Lecture, six years after she had been pushed out of No 10 by her own MPs, she insisted again that “poverty is not material but behavioural”.
In between those two speeches, during her 11 years in power, the reality of Thatcherite policies, of reducing the top rate of taxation while cutting benefits, of devastating manufacturing industry and destroying trade unions, led to a huge increase in both poverty and inequality though the 1980s.
This much as Barbara Castle said back in 1959. The destitution Labour was set up to alleviate had already gone by that point.
There is a Britain in which last year the income for the poorest fifth of the population fell by 3.8% while that of the richest fifth rose by 1.6%.
Well, yes, and using those same ONS numbers we get this:
Median disposable income for the poorest fifth of the population decreased by 3.8% to £14,500 in FYE 2022;
We can check that against global numbers. For a single person household that £14,500 puts one in the top 10% of global incomes. For a two adult one, top 17%. For two adults, two children (and it’s not really possible to be a larger household than that and have an income that low given the benefits system) it’s still true that 75% of the world is poorer.
Yes, those numbers are already adjusted for the different prices in different places, they’re at PPP exchange rates.
Poverty, as an absolute - and barring significant addiction or mental health problems - is something that just no longer exists in Britian.
We do have inequality, most certainly we do. We might have too much of that, or not enough, to taste. But actual poverty, in the sense of having nothing rather than just less than others, that’s gone. Probably worth starting all debates about poverty alleviation with that acceptance that there is no poverty left to alleviate. There’s just inequality, something we may or may not wish to deal with.
Rentiers are indeed a problem
Martin Wolf has a new theory out there:
Even as democratic capitalism was flourishing, the system was getting out of whack. “Rentier” capitalism, in which a small number of people extract more value from the economy than their contribution warrants, has been on the rise since the late 20th century, especially in Britain and the United States. The system is therefore not serving large parts of society, whose members have turned against it. The beneficiaries of this ferment are populists who claim to represent “the people”, but serve them even worse than do the elites who run democratic capitalism.
We’re not sure we do agree with that although we certainly agree that it’s a possibility. Rentiers, rentierism, can get out of hand and if they - it - do then the way can indeed be cleared for something and someone vastly worse. A rational being would prefer some amount of rentiers making hay to any form of democratic socialism for example.
But assume that it is true. What, then, should be done about it?
At which point, a slightly twisted view of the world. Twisted by the usual conventions that is, even if it is in fact the correct, non-astigmatic, manner of looking at things.
Cui Bono? Who benefits from Walmart, or Amazon? Sure, we can call - and many do - the Walton family who inherited 50% of the stock, or Jeff Bezos who enjoys his own shareholding, rentiers. But who in fact benefits from the organisations themselves? For theory we’ve W. Nordhaus on Schumpeterian profits. The entrepreneurs gain perhaps 3% of the total value of their efforts. Near all the rest flows to the consumer.
We can also be more specific. As Jason Furman has pointed out (old figures, of their time) the Walton shareholding in Walmart is perhaps $100 billion of capital. The annual benefit to US consumers of the existence of Walmart is $263 billion. Bezos has been worth $200 billion and now perhaps $120 billion from his Amazon stock. The effect of Amazon more broadly is “a decrease in pass-through inflation.” The other way to put that is that the entire retail structure of the country has become more efficient, thus saving consumers money. Estimates run at around 0.1 to 0.2% per annum off the general inflation rate for a couple of decades. Call that 2% off consumer pricing in those past couple of decades then. Or, in the US economy of $20 odd trillion, $400 billion a year.
As we know from Saez and Zucman we can capitalise such income streams by applying the relevant discount rate. That is how they estimate the wealth distribution after all. The existence of Walmart creates around $5 trillion of wealth for US consumers, of Amazon perhaps $8 trillion.
At which point it’s possible to ask who are the rentiers here? By value allocation it’s not entirely obvious that it’s the Waltons or Bezos. Actually, it looks like it’s consumers who are making out like bandits.
The reason the value gets allocated that way is because both Walmart and Amazon were competitive irruptions into the marketplace, forcing every other capitalist - rentier - to compete with them. It’s the competition that leads to the consumer benefit - the consumer benefit being the thing we’re after in the first place.
At which point the policy to follow to attain our goal is obvious. Maintain the free part of free markets - the ability to enter the marketplace - and watch as the rest of the system does the job for us. As long as people compete to become rentiers then the system works. That very competition to become so being what limits the rent that can then be extracted thereby allocating near all of it to us out here.
Despite what some might think we do not believe that free markets are the answer to everything. They are though the answer to capitalism.